The effect of fee pressure and client risk on audit seniors' time budget decisions

Auditors currently face environmental pressures that create a conflict between controlling costs and maintaining quality standards. Changes in the public accounting environment have increased competition among audit firms, resulting in fee pressure and an emphasis on cost control by reducing the investment in auditing. At the same time, auditors face a serious and escalating litigation crisis that imposes significant costs on audit firms and pressure to improve quality by increasing the investment in auditing.; In such an environment, it is difficult for auditors to balance cost control and quality concerns. Auditors must achieve such a balance when they prepare audit time budgets which, on audits of continuing clients, are frequently prepared by audit seniors. This study examines whether audit seniors' time budget decisions are sensitive to audit fee reductions and changes in client risk. The audit risk model indicates that the investment in auditing should be a positive function of client risk (i.e., inherent and control risk) but unrelated to changes in the audit fee. In the experimental setting, audit seniors completed an audit case for a fictitious client. The results suggest that, inconsistent with the audit risk model, audit seniors (1) decrease the investment in auditing in response to a fee reduction; and (2) increase the investment in auditing in response to an increase in client risk, but only in the presence of a fixed fee. A reduction in the investment in auditing improves short-term profitability, but may not be in the interest of the firm because it increases expected litigation costs. Results further suggest that audit seniors assess lower risk and plan fewer audit tests in the presence of a fee reduction.